Industrial property market rents bottoming out, Colliers Research

With broad based demand, Singapore overall industrial property market rents have been bottoming out, said a recent research by Colliers International. It added that with deteriorating manufacturing and trade statistics, industrial property market rents and occupancy could come under fresh pressure.

The report pointed out that industrialists have already become more cautious on their space requirements, renewals and expansion plans.

• “Business park rents increased 0.5% HOH and 2.1% YOY while factory and warehouse rents saw marginal declines.
• Ageing factories will likely be under the most pressure as more than 78% of the supply pipeline is factory space.
• We recommend landlords of ageing properties consider asset enhancements, such as increasing the floor loading capacity, to be ready for Industry 4.0.’

Widening rental gap between the “new economy” and “old economy”

“Based on advanced estimates from the Ministry of Trade and Industry (MTI), Singapore’s GDP grew by only 0.1% YOY in Q2 2019, the lowest in a decade. As of 22 July 2019, Oxford Economics has further downgraded Singapore’s GDP growth forecast for the year from 1.9% to 0.7%, on weaker Chinese import demand and persistent trade war uncertainties.

According to Colliers, business park monthly rents increased 0.5% HOH and 2.1% YOY to SGD4.33 (USD3.20) per sq foot in H1 2019 amid very tight supply. We notice that tech firms continued to gravitate towards newer business parks and high-tech spaces for good amenities and cost savings.”

The research pointed out that monthly industrial property market rents for high-spec industrial buildings located outside of science parks and business parks increased 1.0% HOH and YOY to SGD2.93 (USD2.16) per sq foot. Meanwhile, average gross monthly rents of warehouse-logistics properties slipped 0.8% HOH and YOY to SGD1.24 (USD0.92) per sq foot.

“Going forward, new business park properties and high-spec spaces should continue to enjoy favorable rental growth due to their premium quality and limited stock, while older factory space may see flat to declining rents. As such, we expect the rental gap of business park / high-specs spaces and the general factory/warehouse space to widen towards the end of 2019.”

The report said that factory space dominates upcoming supply

In taking reference from JTC data, the Colliers Research said that total industrial stock completions in H1 2019 stood at 5.5 million sq feet (511,000 sq metres, net), of which more than 56% are single-user factory spaces.

“These total completions were close to the full year 2018 completions of 5.8 million sq feet (543,000 sq metres). Demand followed supply closely in H1 2019, resulting in a stable all-industrial vacancy rate of 10.7%, unchanged from the end of 2018.

In H2 2019, JTC expects another 10.2 million sq feet (946,000 sq metres, gross) of industrial space, 77% of which are single-user factories. Assuming 90% efficiency, total completed industrial space in 2019 would be around 15 million sq feet (1.4 million sq metres, net), an increase of more than 2.5 times from 2018. New supply across all industrial types is set to further intensify in 2020 to 18.8 million sq feet (1.7 million sq metres, gross), led by multiple-user factories at 47%, before tapering off from 2021 onwards.”

Although prices fell marginally, yields should hold steady predicted the research

“According to JTC, the price index of overall industrial space in H1 2019 decreased by 0.2% from H2 2018, mainly dragged by multiple-user factories in areas zoned for heavy industries (Business 2). Median prices per sq foot for strata-titled units transacted in the first half of 2019 were SGD423 (USD313) for factories, largely stable HOH, and SGD506 (USD374) for warehouses, a 12.3% decline from SGD577 (USD426) in H2 2018.

According to Colliers International’s Asia Cap Rate Report, net yields for industrial properties with short leaseholds of 30 years remained unchanged HOH and YOY at 5.5–6.5% in H1 2019.

We expect capital values for prime industrial properties with freehold or longer land tenure to be firm in the near future due to their scarcity. We note declining interest for 20-year leasehold land in the government land sales as industrialists hold off capital expenditure and expansion plans.”

On demand in the industrial sector, the report said: ” We expect leasing demand to lag behind supply in 2019-2021 due to the weaker trade conditions. We estimate 2018-2023 annual net absorption of 8.6 million sq ft, 25% below the 10-year historical average.

On supply it said: “From JTC’s data, we expect island-wide industrial net supply to be front-loaded in 2019-2020, adding 31.5 million sq ft (net), or 6.0% to total stock, before easing in 2021.”

Touching on industrial property market rents, the research predicted, “Warehouse-logistics rents should remain soft, before stabilizing from 2022 onwards on diminished supply. We expect the rental gap to widen between business parks and factory/warehouse space.”

About Vacancy it said: “We expect overall industrial vacancy rates to slightly increase after 2019 as demand should lag supply. Vacancy should decline after 2022 as supply subsides.”

On Capital Values/Yields, Colliers Research said, “We expect overall industrial capital values to hold steady. Overall yields should remain stable, at about 6.0% for 30-year leasehold industrial properties.”

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